A significant shift is happening in the dynamic of both how most companies get started here in Silicon Valley and the dance between venture start-up investors and entrepreneurs.
In the traditional model, which less and less are holding on to, a start-up entrepreneur usually needed to have some credible business skills to get funded from a venture capitalist. I would get call after call from smart, creative, young and old, entrepreneurs that had a great idea for a product be it the web, mobile or what have you, and they would lament, "No VC will invest in me because they think I am just a product guy and I haven't run a business, but my product idea is truly great... ." Not counting a rare exception, VCs were reticent to trust an investment of capital with someone who had never "run a business" and was just a "product designer." And in all fairness this was quite reasonable because in the old model the first investment checks were bigger and thus the stakes much higher.
Two things changed, and it is interesting to think which one caused the other. First, or at least listed here first, is the trend of Angels, super Angels, and smaller first investments in start-ups (specifically software start-ups). In the old model, typically an investor would raise a series A investment of $3 million to $5 million (or more) and go and build a product and see if it gets traction. In the new model of smaller investments in software start-ups we typically now see a first investment of $300,000 to $800,000, a smaller team, and a much faster and cheaper time to market sprint.
Most insiders attribute this change of smaller investments to the proliferation of cheaper tools and infrastructure requirements (servers, databases, etc.) which now dramatically cut the costs to make and launch a product on the web or mobile. And no doubt this is true. But I don't believe this one fact tells the whole story, or more importantly the truly transformational part of the story.
What more importantly has changed is that start-ups now don't create businesses, they create products or apps (especially in the consumer software arena): apps on Facebook, apps on mobile, or a website that is essentially a single app. Entrepreneurs are more focused. They need to be laser-focused on a single user experience and getting it perfect -- whether it is a game, a social app, a business app, or what have you. They are dedicated to doing one thing right, and nailing it. If they succeed at that, they then can build a business around what that first app has achieved and what they have learned from the process of truly engaging users. We see this all the time, think about Angry Birds, Instagram, Pinterest, SocialCam, etc. These are all great engaging products first, businesses second or even TBD.
What this change has done is transform the balance of demand (and thus power) between the business-skilled entrepreneur and the product designer entrepreneur. As I mentioned above, in the old model the business entrepreneur had the advantage. VCs would fund him or her and then assume they could attract the product design talent to join them. But in the new model of both cheaper capital requirements to a faster time to market time sprint, AND the undeniable reality that you can build a single app and create a billion dollars of shareholder value (Instagram, Angry Birds, Pinterest, etc.) the product designer is now the key person investors bet on for the first investment. In fact in most cases the business entrepreneur is not needed until a successful product has been launch and the resonance with users is proven.
The profile of the designer type includes product managers, product designers, creative designers, product marketers, UI designers, or anyone who deeply understands the customer user experience. Creating a product that users truly want, that has high and real engagement, that gets the user to come back day after day, and has some level of virality, is the requisite precursor to building any consumer software business today. And so in today's new venture capital backed company creating model the designers of the world are both fundable and now in the entrepreneur driver's seat.
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